Promised Freebies Weigh on Malaysia’s Finances

Populist pledges that have piled up ahead of Malaysia’s sprint to the 13th general elections are clouding immediate economic goals of the resource-rich country that aims to be in the same league as its wealthier neighbor Singapore by 2020.

Associated Press

On Monday in Kuala Lumpur, motorists drive beneath campaign flags as Malaysia’s ruling National Front tries to beat back a tough challenge from the opposition.

The opposition coalition, which is posing its strongest challenge ever to the monopoly rule of the National Front, vows to reduce fuel prices and help keep more cash in consumers’ pockets by plugging wasteful government expenditures. It aims to save at least 10% of government spending and channel those funds to finance its measures.

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The National Front coalition, which has ruled Malaysia since it gained independence from Britain in 1957, promises to make cars cheaper, continue cash aids to the poor, and build a million low-cost houses.

“Both manifestos are somewhat similar, so the ballpark cost is about 20 billion ringgit [US$6.5 billion],” said James Chin, a political scientist at the Institute of Southeast Asian Studies.

The ultra-loose fiscal pledges cast doubt on Malaysia’s broader aim to shrink its budget deficit to 4% of gross domestic product this year. The political parties have shied away from detailing plans to boost tax revenue that are unpopular but crucial to manage government finances. Malaysia has run a chronic fiscal deficit since the Asian financial crisis battered its finances in the late 1990s. Last year’s deficit was 4.5% of GDP.

A loose fiscal policy no doubt spurs consumption and boosts short-term growth, but it also fuels inflation. Moreover, if the government borrows more to fund such costly programs, it adds to the country’s debt, which swells interest payments and erodes the capability to finance capital expenditures, such as new ports and roads that add to the economy’s capacity and act as engines for long-term growth. Malaysia’s debt was 53.7% of GDP in 2012, one of the highest in the region. Any more borrowing will take it closer to its self-imposed cap of 55% of GDP and set the alarm bells ringing for rating agencies, which have routinely warned that the country’s weak public finances undermine its credit profile. A cut in sovereign rating from the current investment grade will make Malaysia’s overseas debt-raising plans costlier and difficult.

Malaysia has often been criticized for its practice of spending billions of dollars to shield consumers from global price shocks by subsidizing fuel and food. Analysts say it needs to shift to a targeted subsidy system, giving only the poor access to the cheaper goods. But the government hasn’t yet taken any significant step toward it.

“Fiscal sustainability is very important, and [spending measures] need to be accompanied by increase in revenue,” said Malaysia’s central bank governor Zeti Akhtar Aziz.

It is unlikely that the new government would immediately introduce a goods and service tax that would widen the tax-base and boost revenue or tweak the current subsidy system, analysts said.

Still, “the fiscal policy has to be tightened in the second half [of this year] if the government has to stick to the budget deficit target,” said Rahul Bajoria, Asia economist at Barclays Bank.

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